Exam 6: The Open Economy

Net capital outflow is equal to:

Suppose that the International Monetary Fund (IMF) is concerned about currency depreciation in a small open economy. a. What type of fiscal policy should the IMF propose to the government of the small open economy to generate a currency appreciation? b. Illustrate graphically the impact of the IMF proposal on the exchange rate of the small open economy. c. What will happen to the trade balance of the small open economy, assuming that it started from a position of balanced trade?

A small open economy with perfect capital mobility is characterized by all of the following except that:

Compare the impact of an increase in the government's budget deficit on investment spending in a small open economy with an otherwise comparable closed economy. Assume prices are flexible and that factors of production are fully employed in both economies. Assume there is perfect capital mobility for the small open economy.

For an open economy with perfect capital mobility, when net capital outflow is measured along the horizontal axis and the real interest rate is measured along the vertical axis, net capital outflow is drawn as a:

Use the following to answer questions : Exhibit: Saving and Investment in a Small Open Economy -(Exhibit: Saving and Investment in a Small Open Economy) In a small open economy, if the world interest rate is r₁, then the economy has:

Use the following to answer questions : Exhibit: Policies Influence Real Exchange Rate A) B) C) D) -(Exhibit: Policies Influence Real Exchange Rate) Which of the panels illustrates the impact on the real exchange rate of protectionist trade policies?

A shrinking U.S. budget deficit in the 1990s coincided with a ______ U.S. trade deficit.

In a small open economy, when foreign governments reduce national saving in their countries, the equilibrium real exchange rate:

In a small open economy, starting from a position of balanced trade, if the government increases domestic government purchases, this produces a tendency toward a trade ______ and ______ net capital outflow.

In the 2008 global financial crisis, many investors considered the U.S. economy a safe place to move their assets. What is the predicted impact of this inflow of financial capital to the United States, which is a large open economy, on the U.S. interest rate and the U.S. exchange rate, holding other factors constant? Illustrate your answer graphically and explain in words.

In a small open economy, policies that increase:

The real interest rates and real exchanges rates are constant and equal in North Country and South Country. The Fisher equation and purchasing-power parity hold in both countries. If the nominal interest rate is 8 percent in North Country and 10 percent in South Country, do you expect North Country's nominal exchange rate to appreciate, depreciate, or remain the same? Explain.

An appreciation of the real exchange rate in a small open economy could be the result of:

The real exchange rate is determined by the equality of:

In a small open economy, if the world real interest rate is above the rate at which national saving equals domestic investment, then there will be a trade ______ and ______ net capital outflow.

If purchasing-power parity held, if a Big Mac costs $2 in the United States, and if 10 Mexican pesos trade for $1 dollar, then a Big Mac in Cancun, Mexico, should cost:

If domestic saving is less than domestic investment, then net exports are ______ and net capital outflows are ______.

If a dollar bought 1,000 Chilean pesos ten years ago and 1,500 lire now, and inflation for that period was 25 percent in the United States and 100 percent in Chile, then:

a. If corporate downsizing and lack of job security cause consumers to spend less and save more, what will be the impact on the exchange rate and trade balance? Use the long-run model of a small open economy to illustrate graphically the impact of this decline in consumer confidence on the exchange rate and the trade balance. Assume the country starts from a position of trade balance, i.e, exports equal imports. Be sure to label: i. the axes ii the curves iii. the initial equilibrium values iv. the direction the curves shift v. the new Long-run equilibrium values b. Based on your graphical analysis, explain the predicted impact of a decline in consumer confidence on the exchange rate and the U.S. trade balance.